Should you invest in oil? What are the options for investing in crude oil wells? Not so long ago these questions were not asked, it was a given that oil investment was the thing to do! The price of oil hit its all-time high of $151.72 a barrel in June 2008, even two years ago in may 2014 the price was relatively high at $103.09 a barrel. Today (24th May 2016) the price is at a low of $48.50 a barrel. Although a long way from that aforementioned high, it certainly is nowhere near the low of 1948 of $15.16 a barrel. (image below is Crude Oil Prices – 70 Year Historical Chart). So what is the answer to the initial question now? Should you invest in oil?
Well first off, I’m not a financial advisor anymore and this website is not about giving advice, it’s about giving the best and unbiased information I can to help you come to your own decision. With any investment, you should always seek the professional advice of an advisor, especially if you have never invested before. so I’m just going to give you all the information I can and you can take it from there.
When it comes to investing, the standard call is ‘buy low, sell high’ and oil is at a low price right now, but just because it is low, doesn’t mean you should buy. Why not? Well because it may be low today, but will it remain low tomorrow and the next day and the next…? When investing in oil, precious metals, art, property, stocks, whatever it is, going in at a low price is not always going to guarantee a return. ‘Now you may say, Yes but if I stay in it for the long haul, surely prices will increase?’ Maybe, but there is no guarantee that will happen. This is why when it comes to particularly oil investment you got to consider two things:
Looking at the chart above you can see that in 1973 the price of oil started going up from £19.05 a barrel, to hitting its peak in April 1980 of $116.52 a barrel. From 1980, it then started to slowly decline until it the low of $16.44 in November 1998 (not far off the price in 1948 I mentioned earlier). Then it began to rise again, reaching its highest peak yet, in 2008, and since then it has been on the decline again. So if you were lucky enough to buy into oil in 1973 and waited seven years to sell in 1980 you would have got a good return. Or if you bought in November 98 and waited 10 years to sell in 2008, you would have had a good return then also. The history of any investment type can only tell us how it performed in the past, it cannot tell us how it will perform in the future. Of course, people predict how well an investment may perform in the future all the time. Take for example this prediction by Dan Dicker, a 25 year veteran of the New York Mercantile Exchange where he traded crude oil and natural gas, who predicts that oil will reach the price of $120 a barrel by the end of 2017. He gives a very full and detailed explanation as to why he feels oil will hit similar prices as of 2008, but it doesn’t mean he is right. A simple Google search on oil price predictions will show you that the general consensus is more conservative view. Longforecast.com predicts that oil will reach a barrel price of $80.60 in May 2018 then bouncing between $78 a barrel from June 2015 to $75 a barrel June 2020. Whether it is a conservative $78-80 a barrel or the highly optimistic $120 a barrel, the overall predicted view is that oil prices will increase over the next few years.
Crude oil and its demand cover a plethora of areas. Of course, it is used for the obvious such as gasoline and heating oil, in fact, according to the US Energy Information Administration, about 75% of the 6.79 billion barrels of petroleum used in the US in 2012 were used for gasoline, heating oil/diesel fuel, and jet fuel.
However, oil is not just used for fuel. Plastics, synthetic materials, and chemical products all derive from crude oil and it can be found in many common household items as outlined in the table below.
In addition to the demand for oil to be used as fuel and manufacturing, its demand is affected by the economic growth of a country. If a country’s economy is growing, its growth is of course dictated by consumer demand. If consumers are spending, then growth occurs. If consumers reduce their expenditure then growth slows. This, of course, is only a basis of economics, there are additional factors, but the premise remains. Right now developing countries like China and India do have a high demand for oil, Although India could be replacing China as the main player of global demand growth, nevertheless, as countries develop, demand increases. The price of oil, therefore, is dictated by supply and demand.
check out the different products made with crude oil.
|Pantyhose||Rubbing Alcohol||Carpets||Hearing Aids|
|Motorcycle helmets||Pillows||Shoes||Electrical tape|
|Safety glass||Nylon rope||Fertilizers||Hair coloring|
|Toilet seats||Candles||Credit cards||Aspirin|
|Fishing rods||Linoleum||Soft contact lenses||Trash bags|
|Hand lotion||Shampoo||Shaving cream||Footballs|
|Paint brushes||Balloons||Fan belts||Umbrellas|
|Lipstick||Tennis rackets||House paint||Guitar strings|
|Ammonia||Eyeglasses||Ice chests||Life jackets|
|Cameras||Artificial turf||Artificial Limbs||Bandages|
|Dentures||Ballpoint pens||Nail polish||Caulking|
|Skis||Fishing lures||Perfumes||Shoe polish|
The Different Products Made With Crude Oil
Investing in oil can be done via a number of methods. Each method, of course, has its own level of risk and reward and varies from direct investment in oil and even oil wells to ownership in various energy-related investments.
One direct method of owning oil is through the purchase of oil futures or oil futures options. Futures are highly volatile and involve a high degree of risk. In addition, investing in futures may require you to do a lot of homework as well as invest a large amount of working capital.
Another direct method of owning oil is through the purchase of commodity-based oil exchange-traded funds (ETFs). ETFs trade on a stock exchange and can be purchased and sold in a manner similar to stocks.
In addition, investors can gain indirect exposure to oil through a diversified private placement fund, which combines the safety of a blended portfolio with high-yield tax advantaged income. Private placement funds obtain the ownership interest in oil & gas wells for its partners. Revenue Streams from the production of oil, natural gas, and related products are then passed through to its partners in the form of Quarterly Dividend payments. Tax deductions generated by partnership activities are also passed through to the partners
Because it is difficult to predict the future of any investment, the biggest risk in oil direct investments is not being able to predict with certainty if a new oil well project will be a success. However, despite the lack of future predicted success, the US government gives generous tax benefits to encourage domestic energy exploration and development.
If you consider a private placement fund to provide direct oil investment, you will want to consider ensuring your investment is protected as best as possible. Investors know that diversification is a must when it comes to lowering the risk of loss, and direct oil investment is no different.
The traditional approach to investing in oil directly is to put the entire investment into a single oil well. The problem with that is around 50% of wells drilled are dry holes and only 1 in 10 producing wells are ever outstandingly productive, therefore the risk of losing your entire investment in any one well is over 50% and the chances of getting a good return on your investment is less than 5%.
When we refer to the diversification of investment we mean not putting all your investment eggs in one basket. Don’t invest all your funds in stocks or property. A good investment portfolio will invest in energy, precious metal, stocks, property and the like, so that when one is performing badly, the others will prop it up.
So how does the concept of diversification work within a private placement fund and direct oil investment? By using a diversified private placement fund. This combines the safety of a blended portfolio with a high-yield, tax-advantaged income. By investing in multiple well projects progressively the “dry-hole” risk is spread across the entire well portfolio, significantly reducing the risk to the individual investor with the investment capital spread over dozens of projects. About 4 wells drilled are dry-holes, meaning around 6 of 10 are oil-producing wells. About 2 of the oil-producing wells will be extremely profitable, which means that the risk of losing entire investment over all wells becomes negligible. On top of that, a good quality fund will provide quarterly income dividends, based on the entire well portfolio. Check out our post – oil investment opportunities – and the comment we make at the end concerning Clarke Energy Fund Management (CEFM) who carry out this very thing, or you can visit their website directly at http://www.cefmoilandgasinvestments.com/